Emerging Needs and Tailored Products for Untapped Markets by Luisa Anderloni, Maria Debora Braga and Emanuele Maria Carluccio_9 doc

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Evidence on the Great Crash, the Oil Price Shock, and the Unit-Root Hypothesis,” Journal of Business and Statistics 10: 251–270 Index Note: Page locators followed by “n” refer to footnotes intertemporal capital asset pricing model, 47–48 thick modeling, 48 auto-associative mapping, 44, 46 autocorrelation coefficient, 87 automotive production forecasting example, 145–155 data used in, 146–148 evaluation of, 150–152 interpretation of, 152–155 MATLAB program notes for, 166 models used in, 148–150 autoregressive models, 14, 55, 177 A activation functions, 24–30 Gaussian, 26–28 radial basis, 28–29 ridgelet, 29–30 squasher, 24–28 tansig, 26 Akaike statistic, 86 American options, 138–139 analytic derivatives, 105–107 approximations in decision-making, 23 arbitrage pricing theory (APT), 47–48, 116, 137–143 arithmetic crossover, 73 asset pricing arbitrage pricing theory, 47–48, 116, 137–143 capital asset pricing model, 46–48 decision-making in, 46–49 in emerging markets, 122–125 B backpropagation method, 69–70 bagging predictors, 78 banking intervention example, 204–209 bank lending, property prices and, 173–174, 174n, 186–189, 195 233 234 Index BFGS (Boyden-FletcherGoldfarb-Shanno) algorithm, 69, 78–80 black box criticism, 55–57 Black-Scholes options pricing (BSOP) model, 116, 137–143 bond ratings, 53 bootstrapping methods for assessing significance, 108 for in-sample bias, 101–102 for out-of-sample performance, 202, 204 0.632 bootstrap test, 101–102, 202, 204 bounded rationality assumption, Brock-Deckert-Scheinkman (BDS) test, 91–92, 94 C calendar effects, 61–63 call and put options, 1, 138–140 capital asset pricing model (CAPM), 46–48 capital-asset ratio, 205–206 CAPM beta, 47 chaos theory, 117 See also stochastic chaos (SC) model Chi-squared distribution, 87 Clark-West bias correction test, 98–99 classification networks, 37–38, 49–54, 58 classification problems, 2, 5, 199–210 closed form solutions, 20 conditional variance, 16–17 The Conquest of American Inflation (Sargent), 56 control, convergence to absurd results, 105 in genetic algorithms, 75 local, 33–34, 68–71, 76, 105 corporate bonds example, 156–165 data in, 156–158 in-sample performance, 160–162 interpretation of results, 161–165 MATLAB program notes, 166 models used, 157–160 out-of-sample performance, 160–161 covariance stationary time series, 59–61 credit card risk example, 200–205 crisp logic, 199 crossover, 73–74 cross-section analysis, 14n cross-validation, 101 curse of dimensionality, 18, 41–42, 76 D data preprocessing, 59–65 in corporate bonds example, 157–158 in out-of-sample evaluation, 95 scaling functions, 64–65, 84 seasonal adjustments, 61–63 stationarity, 59–61 data requirements, 102–103 data scaling, 64–65, 84, 109 decision-making in asset pricing, 46–49 brain-imaging models of, 23 use of forecasting in, 3–5 deflation forecasting Index Hong Kong example, 168–182 importance of, 167–168 United States example, 174–175 DeLeo scaling function, 64–65 Dickey-Fuller test, 59–61 Diebold-Mariano test, 96–97 dimensionality reduction, 2–3, 41–46, 211–220 dimensionality reduction mapping, 42, 44 directional accuracy test, 99–100 discrete choice, 49–54 discriminant analysis, 49–50 logit regression, 50–51 multinomial ordered choice, 53–54 neural network models for, 52–53 probit regression, 51–52 Weibull regression, 52 discriminant analysis, 49–50 in banking intervention example, 207–209 in credit card risk example, 200–204 distorted long-memory (DLM) model, 115–116, 135–137 dividend payments, 131 Durbin-Watson (DW) test, 87 E economic bubbles, 135 election tournaments, 74–75 elitism, 75 Ellsberg paradox, 56 Elman recurrent network, 34–38, 58 emerging markets, use of neural networks in, 8, 122–125 Engle-Ng test of symmetry of residuals, 89, 94 235 Euclidean norm, 29 European options, 138 evaluation of network estimation, 85–111 data requirements, 102–103 implementation strategy, 109–110 in-sample criteria, 85–94 interpretive criteria, 104–108 MATLAB programming code for, 93–94, 107–108 out-of-sample criteria, 94–103 significance of results, 108 evolutionary genetic algorithms, 75 evolutionary stochastic search, 72–75 exchange rate forecasting, 100–101, 103 expanding window estimation, 95 expectations, subjective, 23 extreme value theory, 52 F feedforward networks, 21–24 analytic derivatives and, 105–106 in discrete binary choice, 52–53 with Gaussian functions, 26–28 with jump connections, 30–32, 39–40 with logsigmoid functions, 24–28, 31 in MATLAB program, 80–82 multilayered, 32–34 with multiple outputs, 36–38 236 Index feedforward networks, contd in recurrent networks, 34–35 with tansig functions, 26 financial engineering, xii financial markets corporate bonds example, 156–165 intrinsic dimensionality in, 41–42 recurrent networks and memory in, 36 sign of predictions for, 99 volatility forecasting example, 211–220 finite-difference methods, 106–107 fitness tournaments, 73–75 forecasting, automotive production example, 145–155 corporate bonds example, 156–165 curse of dimensionality in, 18, 41–42, 76 data requirements in, 103 exchange rate, 100–101, 103 feedback in, financial market volatility example, 211–220 inflation, 37, 87, 104, 168–182 linear regression model in, 13–15 market volatility example, 211–220 multiple outputs in, 37 out-of-sample evaluation of, 95 predictive stochastic complexity, 100–101 stochastic chaos model, 117–122 thick model, 77–78 use in decision-making, 3, 167–168 foreign exchange markets, 139n forward contracts, 139n “free parameters,” 55 fuzzy sets, 199 G Gallant-Rossi-Tauchen procedure, 62–63 GARCH nonlinear models, 15–20 development of, 15n GARCH-M, 15–17 integrated, 132 model typology, 20–21 orthogonal polynomials, 18–20 polynomial approximation, 17–18 program notes for, 58 Gaussian function, 26–28, 51 Gaussian transformations, 28 GDP growth rates, 125–128 Geman and Geman theorem, 71 genetic algorithms, 72–75 development of, 6–7 evolutionary, 75 gradient-descent methods with, 75–77 in MATLAB program, 78–80, 83–84 steps in, 72–75 Gensaki interest, 186–188 Gompertz distribution, 52 Gompit regression model, 52 goodness of fit, 86 gradient-descent methods, 75–77 Granger causality test, 195–196 H Hang Seng index, 170, 172 Hannan-Quinn information criterion, 85–86 Index Harvey-Leybourne-Newbold size correction, 97 health sciences, classification in, 2n Hermite polynomial expansion, 19 Hessian matrix, 67–69, 76 heteroskedasticity, 88–89, 91 hidden layers jump connections and, 30–32 multilayered feedforward networks in, 32–34 in principal components analysis, 42 holidays, data adjustment for, 62–63, 62n homoskedasticity tests, 88–89, 91 Hong Kong, inflation and deflation example, 168–182 data for, 168–174 in-sample performance, 177–179 interpretation of results, 178–182 model specification, 174–177 out-of-sample performance, 177–178, 180 Hong Kong, volatility forecasting example, 212–216 hybridization, 75–77 hyperbolic tangent function, 26 I implementation strategy, 109–110 import prices, 170–171, 184–185 inflation forecasting feedforward networks in, 37 Hong Kong example, 168–182 237 importance of, 167–168 moving averages in, 87 unemployment and, 104 in the United States, 174–175 initial conditions, 65, 118–119 input neurons, 21 in-sample bias, 101–102 in-sample evaluation criteria, 85–94 Brock-Deckert-Scheinkman test, 91–92, 94 Engle-Ng test for symmetry, 89, 94 Hannan-Quinn information statistic, 86 Jarque-Bera statistic, 89–90, 94 Lee-White-Granger test, 32, 90–91, 94 Ljung-Box statistic, 86–88, 94 MATLAB example of, 93–94 McLeod-Li statistic, 88–89, 94 in-sample evaluations in automotive production example, 150–151 in banking intervention example, 205, 207 in Black-Sholes option pricing models, 140–142 in corporate bond example, 160–162 in credit card risk example, 200–202 in distorted long-memory models, 136–137 in Hong Kong inflation example, 177–179 238 Index in-sample evaluations, contd in Hong Kong volatility forecasting example, 213–214 in Japan inflation example, 189–191 in Markov regime switching models, 128–130 in stochastic chaos models, 118–120 in stochastic volatility/jump diffusion models, 123–124 in United States volatility forecasting example, 216–218 in volatility regime switching models, 132 interest rate forecasting, 37, 146 interpretive criteria, 104–108 intertemporal capital asset pricing model (ICAPM), 47–48 intrinsic dimensionality, 41–42 J jacobian matrix, 107–108 Japan, inflation and deflation model for, 182–196 data in, 184–189 in-sample performance, 189–190 interpretation of results, 191–196 model specification, 189 proposed remedies, 182–184 Jarque-Bera statistic, 89–90, 94 jump connections, 30–32, 39–40 K kurtosis, 90 L lagged values in Elman recurrent network, 34–36 in evaluating models, 116 in implementation, 109 in Ljung-Box Q-statistic, 87–88 in nonlinear principal components, 49 predictive stochastic complexity, 100–101 Laguerre polynomial expansion, 19 land price index (Japan), 186–189, 193 latent variables, 23 learning parameters, 69 leave out one method, 101 Lee-White-Granger test, 32, 90–91, 94 Legendre polynomial expansion, 19 likelihood functions, 16–17 linear ARX model, 14n linear discriminant analysis, 49–50 linear models, 13–15 advantages of, 15 in automotive production forecasting, 148–152 as benchmark, xii in corporate bond example, 159–165 in Hong Kong inflation example, 176–180 in Japan inflation example, 189–192 use of residuals from, 32, 34 linear principal components analysis (PCA), 42–43, 211–220 linear scaling functions, 64 Index linear smooth-transition regime switching system, 40 Ljung-Box Q-statistic, 87–88, 94 local convergence problem absurd results, 105 multiple hidden layers and, 32, 33 in nonlinear optimization methods, 68–71, 76 local gradient-based search, 67 logistic estimation, 53–54 logistic regression, 52–53 logit regression, 50–51 in banking intervention example, 207–209 in credit card risk example, 200–205 logsigmoid (squasher) function, 24–28, 31 logsigmoid transition function, 39 loss function minimization, 66–67 M Markov chain property, 71 Markov regime switching (MRS) model, 115, 125–130 MATLAB program analytic and finite differences in, 107–108 automobile industry program in, 166 availability of, xiv corporate bonds program in, 166 evaluation tests in, 110–111 evolutionary computation in, 83–84 German credit card defaults in, 210 inflation/deflation programs in, 197 239 in-sample diagnostic statistics in, 93–94 main script functions in, 142–143 models in, 58 numerical optimization example, 78–80 polynomial and network approximation example, 80–83 stochastic chaos model in, 117 Texas bank failures in, 210 maximum likelihood estimation, 88 McLeod and Li test, 88–89, 94 model typology, 20–21 modified Diebold-Mariano (MDM) statistic, 97 moving average filters, 63 moving-average processes, 34–35, 87–88 moving window estimation, 95–96 multilayered feedforward networks, 32–34 multi-layer perception (MLP) network, 25, 29 multiperceptron networks, 22 multiple outputs, 36–38 mutation operation, 74 N neglected nonlinearity, 90–91 nested classification, 53 nested evaluation models, 98–99 neural linguistics, 22 neural network approach advantages over nonlinear regression, 33 bounded rationality assumption in, data requirements, 102–103 240 Index neural network approach, contd in detecting neglected nonlinearity, 90–91 differences from classical models, in discrete choice, 52–53 model typology, 20–21 terminology in, neural network smooth-transition regime switching system (NNRS), 39–40 in automotive production example, 150–155 in corporate bond example, 160–165 in Hong Kong inflation example, 176–182 in Japan inflation example, 189–196 neural network types, 21–38 classification networks, 37–38 feedforward networks, 21–24 jump connections, 30–32, 39–40 multiple outputs in, 36–38 radial basis functions, 28–29 recurrent networks, 34–36 ridgelet function, 29–30 squasher functions, 24–28 Nikkei index, 186–187 nonlinear estimation, 65–77 genetic algorithms, 67, 72–75, 78–80, 83–84 hybridization, 75–77 initial conditions in, 65–66 local gradient-based searches, 67 MATLAB examples of, 78–83 simulated annealing, 67, 70–72, 78–80 thick modeling, 77–78 nonlinearity, tests to determine, 90–92 nonlinear principal components analysis (NLPCA), 44–46, 211–220 nonstationary series, 60 normal distributions, 89–90 normal (Gaussian) function, 26–28 O options pricing Black-Scholes model, 116, 137–143 seasonal adjustment in, 63 SVJD model for, 123 ordinary least squares (OLS) estimators, 20 orthogonal polynomials, 18–20, 80–82 orthogonal regression, 42–43 out-of-sample evaluation criteria, 94–103 data requirements, 102–103 Diebold-Mariano test, 96–97 in nested models, 98–99 predictive stochastic complexity, 100–101 recursive methodology, 95–96 root mean squared error statistic, 96, 219n, 220 sign prediction success ratios, 99–100 out-of-sample evaluations in automotive production example, 151–153 in banking intervention example, 207–208 in Black-Sholes option pricing models, 142–143 in corporate bond example, 160–161, 163 Index in credit card risk example, 202–205 in distorted long-memory models, 137–138 in Hong Kong inflation example, 177–178, 180 in Hong Kong volatility forecasting example, 214–215 in Japan inflation example, 190–192 in Markov regime switching methods, 130–131 in stochastic chaos models, 120–122 in stochastic volatility/jump diffusion models, 125–126 in United States volatility forecasting example, 218–219 in volatility regime switching models, 132–134 out-of-sample predictions, output gap, 169–170, 184–185 output neurons, 21–22 P parallel processing, 21–22 parallel processing advantage, 22 parametric models, 20 Pesaran-Timmerman directional accuracy test, 99–100 Petersohn scaling function, 64, 84 Phillips and Perron test, 61 Phillips curve model, 56, 169, 174 Poisson jump process, 122 polynomial approximation, 17–18 polynomial expansions, 18–20 241 portfolio management, forecasting in, predictive stochastic complexity (PSC), 100–101 price equalization, 168 price gap, Hong Kong, 170, 172–173 price puzzle, 188 pricing of risk, 1–2, pricing options Black-Scholes model, 116, 137–143 seasonal adjustment in, 63 SVJD model for, 123 principal components in asset pricing, 46–49 intrinsic dimensionality in, 41–42 linear, 42–43 nonlinear, 44–46 program notes for, 58 principal components analysis (PCA), 42–43, 211–220 principle of functional integration, 23 principle of functional segregation, 23 probit regression, 51–52 in banking intervention example, 207–209 in credit card risk example, 200–205 put options, 1, 138–140 Q quasi-Newton algorithm, 67–69, 78–80, 83 R radial basis function (RBF) network, 28–29 random shocks, 34, 47, 70, 117, 149 242 Index reconstruction mapping, 42, 44 recurrent networks, 34–36 recursive methodology, 95–96 regime switching models Markov, 115, 125–130 smooth-transition, 38–40 volatility, 115, 130–134 regularization term, 86n residuals, use of, 32, 34, 85, 89 ridgelet networks, 29–30 robust regression, 45–46 root mean squared error statistic, 96, 219n, 220 R-squared coefficient, 86 S saddle points, 65–66, 69 Sargent, Thomas J., The Conquest of American Inflation, 56 Schwartz statistic, 86 seasonal adjustments, 61–63 semi-parametric models, 17–18, 20 serial independence tests, 86–89 shuffle crossover, 73 sieve estimator, 23–24 significance of results, 108 sign prediction success ratios, 99–100 simulated annealing, 67, 70–72, 78–80 single-point crossover, 73 skewness, 90 smooth-transition regime switching models, 38–40 in automotive production example, 149–155 in corporate bond example, 159–165 in Hong Kong inflation example, 176–182 in Japan inflation example, 189–196 softmax function, 53–54 sparse data sets, 42 squasher functions, 24–28, 31 stationarity, 59–61 stochastic chaos (SC) model, 115, 117–122 stochastic search methods evolutionary, 72–75 simulated annealing, 67, 70–72, 78–80 stochastic volatility/jump diffusion (SVJD) model, 115, 122–125 strike price, 140, 140n swap-options (swaptions), 48 symmetry of residuals, 89 synapses, 22 T function, 26 tansig function, 26 Tchebeycheff polynomial expansion, 18–19, 19n terminology, thick model forecasts, 77–78, 110 thick modeling, 48, 77–78 threshold responses, 24–25 time-series recency effect, 103 times-series examples, 145–166 automotive production forecasts, 145–155 corporate bonds, 156–165 times-series models, 14, 14n transition function, 38–40 t statistic, 108 U uncertainty, model, 55–56 United States, volatility forecasting example, 216–220 Index unit labor costs, 170–171, 184, 186 unit root processes, 60, 135, 135n unsupervised training, 41 V vector autoregressive models (VAR), 168, 188 vocabulary of neural networks, 243 volatility regime switching (VRS), 115, 130–134 W Weibull regression, 52 in banking intervention example, 207–209 in credit card risk example, 200–205 Weierstrass Theorem, 17–18 welfare index, 4–5 ... Domenico, and Alessandro Vicini (1998), “Coupling Genetic Algorithms and Gradient Based Optimization Techniques,” in Quagliarella, D., J Periaux, C Poloni, and G Winter (eds.), Genetic Algorithms and. .. Strategy in Engineering and Computer Science: Recent Advances and Industrial Applications West Sussex, England: John Wiley and Sons, Ltd Quagliarella, D., J Periaux, C Poloni, and G Winter (1998),... (1998), Genetic Algorithms and Evolution Strategy in Engineering and Computer Science: Recent Advances and Industrial Applications West Sussex, England: John Wiley and Sons, Ltd Razzak, Weshah